2025 (5) TMI 705 - AT - Income Tax

Revision u/s 263 - CIT treating the order of the AO erroneous and prejudicial to the interest of the revenue on the ground that the assessment was framed by AO without making necessary enquiries or verification with respect to payment made to M/s DLF Commercial Project Corporation out of total amount received on sale of land - HELD THAT - No error could be attributed on the said transaction carried out by the assessee. The entire narrations of facts together with supporting documents were also placed on record by the assessee before the learned PCIT. PCIT nowhere says as to how the order of the learned AO is erroneous except making a bold statement that the AO has not made necessary enquiries with regard to the said transaction. But from the perusal of the aforesaid facts we find that the learned AO indeed had made adequate enquiries and had taken the enquiries to the logical extent. Hence it is not a case of lack of enquiry or even inadequate enquiry. Accordingly the deeming fiction provided in Explanation 2 to section 263 of the Act which was heavily relied upon by the learned DR before us would not come to the rescue of the revenue. As in the instant case adequate enquiries were indeed carried out by the learned AO in the assessment proceedings itself. Even otherwise we find that Explanation 2 to section 263 was never sought to be invoked by the learned PCIT in the show cause notice issued under section 263 of the Act dated 28-1-2019 but the same was directly applied in the revision order passed u/s 263 of the Act. There is absolutely no loss to the exchequer qua the subject mentioned transactions as the concerned parties have duly offered to tax in their respective returns with regard to their respective share. Consequentially there is no prejudice to the interest of the revenue. Revision jurisdiction u/s 263 of the Act could not be invoked for carrying out a revenue neutral exercise. Reliance in this regard is placed on the decision in the case of CIT vs Excel Industries Ltd 2013 (10) TMI 324 - SUPREME COURT No hesitation to hold that the learned PCIT erred in invoking revisionary jurisdiction u/s 263 - Appeal of the assessee is allowed.

Summary

The core legal question considered by the Tribunal was whether the learned Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary jurisdiction under section 263 of the Income-tax Act, 1961, to revise the assessment order passed under section 143(3) of the Act for the assessment year 2014-15.

This issue arose from the PCIT's contention that the assessment order of the Assessing Officer (AO) was erroneous and prejudicial to the interests of the revenue, specifically on the ground that the AO had accepted the assessee's declaration of income without adequately verifying the payment of Rs. 31,58,36,000 made to M/s DLF Commercial Projects Corporation (DCPC) out of the total sale consideration of Rs. 66,92,00,000 received on sale of agricultural land. The PCIT argued that since DCPC did not carry out any development activities or obtain the township license as per the development agreement, the entire sale consideration should have been declared by the assessee, and the amount paid to DCPC should have been disallowed as expenditure.

Hence, the Tribunal's analysis focused on whether the AO had conducted necessary enquiries and applied his mind properly before accepting the income declared by the assessee and disallowing the PCIT's revision under section 263.

Issue-wise Detailed Analysis:

1. Scope and validity of revisionary jurisdiction under section 263 of the Act

The Tribunal referred extensively to the legal framework governing the exercise of revisionary powers under section 263. It cited the Supreme Court's decision in Malabar Industrial Company Ltd. v. CIT, which clarified that the PCIT can invoke section 263 only if the AO's order is both erroneous and prejudicial to the interests of the revenue. The Court emphasized the twin conditions: (i) the order must be erroneous, and (ii) the error must cause prejudice to revenue. If either condition is absent, revision cannot be invoked. Furthermore, the Court held that the provision is not intended to correct every mistake but only those errors that result in loss of tax lawfully payable.

The Tribunal also referred to several decisions of the Delhi High Court which held that if the AO had made enquiries and was satisfied with the assessee's submissions, mere non-mention of such enquiries in the assessment order does not justify invoking revision under section 263.

2. Examination of the AO's enquiries and findings

The Tribunal scrutinized the assessment proceedings and noted that the AO had issued detailed notices under section 142(1), including queries specifically relating to the sale of land, sale consideration, sale deeds, and development agreements. The assessee had responded with comprehensive submissions and documentary evidence, including copies of sale deeds, development agreements, and financial statements.

The AO accepted the assessee's claim after examining the documents on a test check basis and framed the assessment under section 143(3) without raising any adverse comments on the veracity of the documents or the transaction.

The Tribunal highlighted that the AO was aware of the payment made to DCPC and that DCPC had declared its share of income in its tax return. The AO also had before him confirmations from DCPC acknowledging receipt of the amounts and their tax filings, as well as the bank statements evidencing receipt of funds by DCPC.

Therefore, the Tribunal concluded that the AO had made adequate enquiries and applied his mind before accepting the assessee's return and that there was no lack or inadequacy of enquiry.

3. Nature of the transaction and accounting of income

The assessee's case was that it entered into a development agreement with DCPC, under which DCPC was to carry out development activities on the land. Clause 2.6 of the original agreement gave DCPC a right (but not obligation) to purchase the land at a fixed price if it failed to obtain the township license within the stipulated time. The supplementary agreement modified the consideration to "cost of land plus Rs. 5 lakhs per acre."

The assessee sold the land directly to a third party and paid DCPC its agreed share of the sale consideration, which was duly reflected in the sale deed and accounted for in the books of both parties. The assessee declared its share of income in its profit and loss account, including a component disclosed as "compensation received" under other income. DCPC declared its share of income net of this compensation.

The Tribunal found that the transaction was consistent with the agreements and that the amounts received by DCPC were offered to tax in its hands, thereby negating any claim of revenue loss.

4. Application of Explanation 2 to section 263

The Revenue argued that Explanation 2 to section 263, which deems an order erroneous if the AO has not made any enquiry or verification, applied. However, the Tribunal observed that this Explanation was not mentioned in the show cause notice issued under section 263 but was invoked only in the revision order. The Tribunal relied on a Gujarat High Court decision holding that invoking Explanation 2 without giving the assessee an opportunity to be heard is not sustainable in law.

Given the extensive enquiries made by the AO and the evidence on record, the Tribunal held that Explanation 2 was inapplicable.

5. Consideration of competing arguments

The PCIT contended that since DCPC did not perform development activities or obtain the township license, the payment to DCPC should be disallowed. The Tribunal rejected this argument, noting that the AO had considered the development agreement, the supplementary agreement, and the sale deed, and found no evidence that the payment was not in accordance with the agreements or that it was not an expenditure wholly and exclusively for business purposes.

The Tribunal further observed that the PCIT failed to specify any concrete error in the AO's order or how the enquiry was inadequate. The PCIT's conclusion was a bald assertion unsupported by facts or legal reasoning.

6. Conclusion on the exercise of revisionary jurisdiction

Based on the above analysis, the Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the interests of the revenue. The AO had conducted necessary enquiries, examined the evidence, and accepted the income declared by the assessee and DCPC, who had also offered the income to tax. Therefore, the PCIT's invocation of revisionary jurisdiction under section 263 was unjustified and amounted to a revenue-neutral exercise, which is impermissible.

The Tribunal relied on the Supreme Court's decision in CIT v. Excel Industries Ltd., which held that revision under section 263 cannot be invoked for revenue-neutral matters.

Significant Holdings:

"A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income Tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the assessing officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent ... recourse cannot be had to section 263(1) of the Act."

"Every loss of revenue as a consequence of an order of assessing officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income Tax Officer is unsustainable in law."

"If the Assessing Officer during the scrutiny assessment proceedings raised a query which was answered by the Assessee to the satisfaction of the Assessing Officer but the same was not reflected in the Assessment Order by him, a conclusion cannot be drawn by the Commissioner that no proper enquiry with respect to the issue was made by the Assessing Officer, and enable him to assume jurisdiction under Section 263 of the Act."

"The proceedings in question have no alternative but to be dropped under intimation to the assessee company."

"Revision jurisdiction u/s 263 of the Act could not be invoked for carrying out a revenue neutral exercise."

Accordingly, the Tribunal quashed the revision order passed under section 263 and allowed the appeal of the assessee, holding that the PCIT's assumption of revisionary jurisdiction was erroneous and unjustified in the facts and circumstances of the case.